- Rates: Risk aversion lifts core bonds
Disappointing earnings and negative headlines on the US-Sino trade talks weighed on risk sentiment. US Treasuries eventually followed Bunds higher. Risk sentiment will remain today’s main driver for trading and could further underpin bonds in a daily perspective. Strong US eco data can provide some counterweight.
- Currencies: dollar declines even as sentiment turns risk-off
The USD rebound ran into resistance yesterday. EUR/USD bottomed ahead of the key 1.1180/90 support area. A risk-off correction finally also pushed US yields lower, reducing interest rate support for the dollar. Risk sentiment will likely dominate USD trading today. The EUR/USD downside looks well protected. Sterling continues fighting an uphill battle.
The Sunrise Headlines
- US equities lost further momentum yesterday with stocks declining up to -0.65% (S&P500). Asian markets slip in the wake of WS’s performance, Japan (-2%) underperforms as the yen strengthens.
- US/Sino trade talks have stalled. The White House is figuring out how to address China’s demand to ease restrictions on Huawei after president Trump promised to do so at the G20 summit end-of-June.
- The central bank of South Korea unexpectedly cut rates from 1.75% to 1.50% as it lowered its 2019 GDP growth forecasts to 2.2% (from 2.5%) and cut inflation projections to 0.7% (from 1.1% in April).
- Australia’s June job report showed a meagre 500 new jobs (part time -20.6k, full time +21.1k) after two strong months. The unemployment rate stabilised at 5.2% while the participation rate increased to 66%.
- Regional Fed districts suggested a modest eco expansion in the latest Beige Book. The outlook was generally positive with continued labour market tightness. They noted “widespread concerns” about the impact of trade policy.
- The House overwhelmingly blocked a Democratic member’s bid to impeach president Donald Trump over his comments about several liberal congresswomen which the House condemned as racist yesterday.
- Today’s eco calendar contains the US Philly Fed business outlook for July and the weekly jobless claims. June retail sales are due in the UK. Fed’s Bostic and Williams are scheduled to speak. Spain and France tap the bond market
Currencies: Dollar Declines Even As Sentiment Turns Risk-Off
Dollar declines even as sentiment turns risk-off
The dollar rebound ran into resistance yesterday. Trading was mostly technical in nature. Still, slightly higher than expected EMU headline inflation (1.3% Y/Y) maybe helped stopping the EUR/USD downside drift. The pair bottomed in the 1.12 area. Later in the session, a further decline in US yields finally also weighed on the dollar. EUR/USD finished at 1.1224 (from 1.1211). Deepening US equity losses pushed USD/JPY back below the 108 handle (close at 107.95).
Investor sentiment is deteriorating further in Asia. Investors fear disappointing corporate earnings. Trade talks between the US and China are said to be deadlocked on the US restrictions versus Huawei. Japan June trade data disappointed (both imports and exports declined). A surprise Bank of Korea rate cut fails to change investor sentiment for the better. The yen is also well bid. USD/JPY extends its decline (currently 107.70 area). The dollar is also ceding modest ground against the euro with EUR/USD trading in the 1.1240 area. Later today, there are no EMU data. The US Philly Fed business outlook is expected to improve (5.0 from 0.3) and jobless claims to stay low (216k). However, even a positive US data surprise probably won’t change investors’ mindset. Earnings and equity sentiment will set the tone for trading. A risk-off correction might incur further USD/JPY losses. The impact on EUR/USD is less straightforward. European assets often underperform in a risk-off context. At the same time, the low-yielding euro is an important funding currency for carry trades. Unwinding of those trades might cause euro buying. Lower US yields are a USD-negative too. The jury is still out, but the EUR/USD 1.1181 support looks solid short-term. Global picture: EUR/USD drifted lower in the 1.11/1.14 range but rebounded (temporary?) after Powell paved the way for a July rate cut. A rebound to the 1.13 would further ease the downside momentum. With the most important data before the July FOMC meeting printed, more trading near current levels is likely.
Sterling remained in the defensive yesterdat as investors see a growing chance that the political turmoil might finally lead to a no deal Brexit This sentiment was reinforced by comments of Brexit Secretary Barclay as he said that the risk of a no-deal Brexit is ‘underpriced’. EUR/GBP retained recent gains and hovered lower half of the 0.90 big figure. Today, UK June retail sales are expected to show a third consecutive monthly decline. Even in case of a positive surprise, we expect any GBP-rebound to stay limited as Brexit uncertainty continues to dominate.
EUR/USD rebounds even as sentiment turns risk-off